The economic variables in the country were making it tough for consumers, driving new vehicle sales lower and delaying the replacement of car fleets.
Steven Barker, the head of secured lending at Standard Bank, said yesterday that if any ratings agency downgrades caused further rand depreciation, this might result in further interest rate hikes and cause more financial strain for consumers.
Barker said the value of the rand and interest rates were already linked but he questioned whether there would be an interest rate hike as soon as there was a run on the rand, particularly a further interest rate increase had probably already been discounted by the market.
A further increase in interest rates could be prompted by a ratings agency downgrade or one bad economic figure and place consumers under more strain. This was particularly if interest rate hikes occurred in rapid succession because then consumers would not have time to adjust to the higher rates.
Ratings agencies Standard & Poor’s and Fitch will release their new sovereign ratings for South Africa tomorrow, with many analysts expecting a downgrade.
Barker said the possibility of the economy going into recession would affect the sales of both passenger and commercial vehicles.
“There was a welcome respite last month when the Reserve Bank decided not to increase the base prime interest rate despite many predictions to the contrary, Barker said.
“However, rates are on their way up. We know the rates increase cycle is coming. It’s just a matter of time. More cautious vehicle buyers will consider this and the impact it could have on mortgages and other financial commitments. On the other hand, many buyers will stay in the market and either ‘buy down’ or look to acquire a pre-owned vehicle.”
Barker said the overall new vehicle market was expected to decline by 3 percent this year and the passenger car market by a greater percentage. Factors that might assist new vehicle sales growth included new model introductions, extended warranties and sales-incentive plans.
The key factors moderating growth in sales of new cars this year included the growth rate of the country’s gross domestic product, the disposable income of consumers and the rand exchange rate.
Nicholas Nkosi, the head of vehicle and asset finance at Standard Bank, said the financial challenges faced by most South Africans had been put in the spotlight by the 7 percent decline in new vehicle registrations in the first five months of this year, compared with the corresponding period last year.
Nkosi said history had shown that a 0.5 percentage point increase in the base interest rate resulted in car sales dropping by 2 percent.
“Vehicle affordability has been placed under pressure not only by the low value of the rand but domestic pressure that has included toll fees, fluctuating fuel costs and increasing vehicle maintenance costs,” Nkosi said.
“As a result, consumers looking for value in the personal car segment are opting to buy low mileage pre-owned vehicles.”
He said the average replacement time of vehicles had increased but not dramatically, while the size of deposits had dropped, residual values had steadily increased and the average term of vehicle finance agreements had lengthened.
Nkosi anticipated inflation on new vehicles this year to average 6 percent, and he stressed that prices would increase gradually to avoid them being a shock to consumers.